All business loans come with fees and interest, but bridging loans can be considerably more expensive than other types of commercial finance.
Although they have high interest rates and arrangement fees, this doesn’t make them unaffordable. We break down how much a bridging loan costs, including any bridging loan rates and fees you may need to consider.
What is a bridging loan?
A bridging loan is a short-term finance solution designed to help businesses access funds quickly, typically for a property purchase or renovation.
It’s used to bridge the gap between two financial events, such as buying a property before selling another or covering time-sensitive costs, while waiting for longer-term funding.
What are bridging loan interest rates?
Bridging loan Interest rates vary from lender to lender, depending on the loan structure and the borrower’s risk profile. Typically, rates range between 0.5% and 1.5% per month, though they can reach up to 2% for higher-risk applications.
Unlike most business finance products, which charge annual interest, bridging loans calculate monthly interest. There are three main ways this interest can be applied:
- Monthly: Interest is charged and paid each month, and not added to the outstanding loan balance
- Rolled-up: Interest is accrued each month, added to the loan balance, and repaid in full at the end of the term
- Retained: The lender works out the total interest due over the term and adds it to the balance to be paid
How interest is structured can significantly impact the total cost of your loan, so it’s important to understand which option you’re being offered.
What fees come with a bridging loan?
There are several potential bridging finance fees that can significantly increase the overall cost of your loan. Bridging loan fees include:
- Arrangement fee: This fee is charged as a percentage of how much you want to borrow, usually around 2%. It is typically added to the loan balance and paid at the end of the term when the loan is settled.
- Valuation fee: If the loan is for a property purchase, this fee covers the cost of a surveyor carrying out a valuation. The cost varies depending on the property’s value, and the fee is usually paid before you receive your final offer.
- Legal fee: This covers any legal work involved in setting up the loan. In most cases, you will need to pay your own legal costs and the lender’s, which are usually paid upfront.
- Exit fee: Some lenders charge a fee when you repay the loan, often calculated as a percentage of the original loan amount, typically around 1%. Not all bridging loans include this fee, so it’s worth checking.
- Broker fee: If you use a broker or intermediary to arrange your bridging loan, they may charge a fee for their services. This fee can be a fixed amount or a percentage of the loan, paid upfront or added to the balance.
It’s important to factor in all fees when calculating the total cost of your bridging loan. Since many borrowers plan to repay early, often from the proceeds of a sale, exit fees can make a meaningful difference, so check these carefully.
Do bridging loans cost more than a standard business loan?
Bridging loans are typically more expensive than traditional business loans. This is because they are designed for short-term use and can often be arranged faster than other financing options, often within days.
Most business loans charge interest annually over long repayment terms, but bridging loans are usually charged monthly at higher rates. They also come with additional fees, including arrangement and exit charges.
However, while bridging loans can be more expensive, they offer advantages over other types of finance. Because they offer speed and flexibility, they’re ideal for time-sensitive situations like securing a property quickly, or bridging a temporary cash-flow gap.
What affects how much a bridging loan costs?
The cost of a bridging loan depends on how much you borrow, how long you need the funds for, and the overall risk to the lender.
Bridging loans are designed for short-term use, so it’s possible to borrow large sums over a relatively short period, but interest rates and fees can vary widely.
Several factors influence the total cost:
- Loan amount and term: Larger loans and longer terms can increase overall costs, especially if interest is rolled up or retained.
- Loan-to-value (LTV) ratio: The more you borrow in relation to the asset’s value, the higher the risk, which can result in a higher interest rate.
- Type and value of security: Lenders assess the asset you’re securing the loan against, and the condition or location of the property can impact the interest rate.
- Exit strategy: A clear and credible plan for repaying the loan, like a property sale or refinance, can help reduce risk and lower costs.
- Credit history and business profile: While bridging lenders are generally more flexible, a good business credit score can result in better rates.
Because each case is assessed individually, there’s no set cost for bridging finance. However, it will usually cost more than standard commercial lending options.
How to reduce the cost of a bridging loan
As bridging finance can be more expensive than other funding options, it’s worth looking at ways to reduce the cost:
- Only borrow what you need: Interest is charged on the full loan amount, so avoid over-borrowing.
- Repay as soon as possible: The quicker you repay, the less interest you’ll pay overall.
- Improve your credit profile: A stronger credit history could help you access lower bridging loan rates.
- Offer strong security: High-quality assets and a low LTV can reduce the perceived risk for the lender.
- Have a clear exit strategy: A realistic repayment plan can help you negotiate better terms.
Taking these steps can make bridging finance more cost-effective, and make your application more appealing to lenders. It’s a good idea to use a business loan calculator to help you understand how much a loan could cost.
Apply for a bridging loan at Aurora Capital
Bridging loans can be expensive, but with the right exit strategy to pay them off, they can prove incredibly useful.
If you have questions about how to apply for a bridging loan or our rates and fees, please contact us, and one of our expert advisers can discuss your options.
Alternatively, if you’re confident that it’s the right option for you, apply for a bridging loan online and our expert team will match you with a lender.
